US Companies Facing Increased Diligence, Compliance Burdens in Hong Kong

U.S. companies operating in Hong Kong could face a range of complications due to the region’s new national security law, said Dustin Daugherty, head of North American business development with Dezan Shira & Associates. Although Daugherty sees reasons to be optimistic about Hong Kong’s business environment, he said the region seems to be losing many of its trade advantages.

The national security law, combined with U.S. sanctions in response, creates a host of new due diligence burdens for U.S. companies, Daugherty said. Speaking during an Aug. 27 webinar hosted by Dezan Shira, which focuses on foreign investment in Asia, Daugherty said companies will need to take extra precautions to avoid making “politically unwelcome” statements that may violate the new law, such as the topic of Hong Kong’s autonomy from Beijing.

“This might be really hard to do in the age of global communication and social media in terms of regulating all your employees' activities,” Daugherty said. “It remains to be seen how this is going to be implemented in practice, but the sheer scope of it certainly raises some concerns.”

The U.S. responded to the passage of the national security law earlier this year by revoking Hong Kong’s special customs status and sanctioning a range of Hong Kong officials, including Hong Kong leader Carrie Lam (see 2008070039 and 2008120020). Companies may find it difficult complying both with Hong Kong regulations and U.S. sanctions, Daugherty said. “This is a major compliance burden and requires a lot of red flag checks, blacklist checks and so on,” he said. “So it just adds to the complexity and the requirements of due diligence.”

Companies may also face Chinese retaliation. Daugherty said some clients have reported discrimination by Chinese state-owned companies, although he stressed that the claims are unofficial. “We have heard … state-owned enterprises in China are being told not to buy products from U.S. companies,” Daugherty said. “I don't know how widespread this is … but some of our clients have been affected, and that could be potentially quite serious.”

While Daugherty said Dezan Shira is “still optimistic about many sectors of Hong Kong's economy,” other international trading hubs might be more appealing. He pointed to Singapore, which he said “matches Hong Kong more or less step per step on every major ease-of-doing-business indicator,” adding that its location brings businesses closer to India, another China alternative.

“What exactly is Hong Kong’s competitive advantage now? And what is it going to be in 10 years?” Daugherty said. “We are seeing a slow erosion of Hong Kong's advantages.”